AUD Aussie BOE BOJ Bank of England Bank of Japan Bernanke CAD CPI Carry Trade Credit Crunch ECB EUR Euro European Central Bank FOMC Fed Franc G7 G8 GBP GDP Greenback Hank Paulson IFO IMF ISM Ifo India JPY Kiwi Lacker Loonie NZD PMI PPI Papademos Peso Pound RBA RBNZ Real Reserve Bank of Australia Rupee SEC Trichet USD World Bank Yen ZEW Survey comments consumer confidence dove durable goods fibonacci finance minsiter fundamental housing inflation interest rates jobs report minutes oil range bound rate cut rate hike technical analysis trade balance upcoming reports

Euro, US Numbers In Line

Jul 31, 2008

Key economic indicators out of Europe and the US this morning fell within range of expectations.

At 5am, Eurozone CPI registered 4.1% as expected. While that is 2% better than the ECB mandate of 2% CPI, chances for an ECB rate hike next month appear slim. Deteriorating economic conditions across much of Europe has led the bank to conclude demand will naturally fall off and thus curb price pressures.

This view was further bolstered by a slight up tick in Eurozone unemployment (7.3% vs expected 7.2%) and German employment losses (down 20k jobs).

In the US, Q@ GDP came in an initial reading of 1.9%. However, the big news was a downward revision in 2007 Q4 from 0.6% to -0.2%. Q1 2008 GDP was also revised lower from 1.0% to 0.9%.

The combined events initially sent the EURUSD above 1.56. However, the pair has declined below 1.56 ahead of the Non farm Payroll Report.
Euro, GDP, CPI, jobs report, USD

EURUSD Preview

Jul 30, 2008

The EURUSSD pair could see significant action the next 2 days.

To recap, the pair remains in a 5 month range of 1.53 - 1.60. In early July, as the Indy Mac collapse and fears over Fannie Mae and Freddie Mac swept through markets, the pair briefly went above 1.60.

In the last 2 weeks, as various levels of the US government moved to shore up banking, and oil has decline some 15%, the greenback has recovered.

Today, despite a 3% rise in crude oil futures, US stocks and the Dollar remained strong. The Dollar came within 66 pips of the the very important 1.55 support. Since April, every trend that has passed through 1.55 has been sustained for no less than 2 weeks.

As the week ends, the EURUSD pair can move on 3 key events.

Thursday
At 5am eastern Eurozone CPI and unemployment will be released.

On CPI, the number is likely to come in as expected (4.1%), as German CPI came in as expected Tuesday. Given recent drops in consumer confidence and growing signs of a slowdown spreading across Europe, the CPI would have to come in sharply higher to justify any speculation of a further ECB rate hike.

The monthly decline in French employment may signal some weakness in the unemployment. Though, any miss is likely to be very narrow at this stage.

At 8:30 am, US Q2 Annualized GDP will be released

Expectations are all over the map on this one. I have seen calls from 1.0% to 4%. Given the impact of stimulus checks and a jobs number that has stubbornly held below 5.8%, annualized 2% or better seems likely.

Tomorrow seems to hold 3 scenarios (Note: I have listed them in the order I think most likely to occur)
- If numbers come in as expected, look for the pair to hover around 1.55 as traders wait for the Non Farm payroll report Friday.

- If US GDP comes in over 2% and Eurozone CPI reads 4.1% or lower, look for the US Dollar to break the 1.55 support.

- Should Eurozone CPI come in extremely hot (4.3% or more) and the US GDP disappoint, look for the Euro to push up to 1.57 resistance.


Friday
At 8:30am US Nonfarm payrolls and Unemployment Rate will be released

While the ADP report can be widely inaccurate, last month, the number was foretelling (coming in at -79k vs -74k in the NFP). Today, the ADP came in at +9k, suggesting the NFP will beat expectations. With initial claims dipping below 400k, and the 4 week average declining, their is definitely room for optimism. Right now, markets expect a reading of -75k.

Should the NFP beat expectations, it will definitely be dollar bullish and expectations for a Fed hike in late 2008 are likely to increase.

At this point, I do think the EURUSD is likely to close below 1.55 this week.
Euro, GDP, CPI, jobs report, EUR, USD

US Battles the Credit Crunch

Jul 28, 2008

The dual track of limiting naked short selling and increased government powers to help Fannie and Freddie seems to have worked for at least the short term. Since that fateful Tuesday, both stocks have rebounded nicely.

And now the US wants to keep that momentum going. Today, movement was made in 3 key areas.

1) SEC Expanding Curbs on Shorts

In a Wall Street Journal article today, they indicated that curbs to shorts may in fact expand. Other industries such home builders, insurance, and other financials may now be included.

The temporary limits covering 19 financials was set to expire at 11:59pm est Tuesday July 29.

The SEC held calls with a major fund association over the weekend to discuss the issue. Of great concern to funds was the ability for computer traded programs to adjust their software for the new rules. That would seem like a technical problem for the industry rather than a major hang up for the SEC.


2) FOMC to Improve Inflation Transparency

As of today, Committee officials use core inflation to set a sustainable price target for the next 3 years.

In a speech in Washington today, outgoing Fed Governor Mishkin outlined how that might be improved. He suggested 3 key changes.
a) Set a mandate rate like that used in England and Europe
b) Switch to 5 year forecasts
c) Use headline inflation rather than core inflation.

This speech is notable as Governor Mishkin is sometimes thought of as an inflation dove. The wide divergence between headline and core inflation in recent months makes the third point unlikely for the near term. However, a mandate rate (which he has long supported) and 5 year outlooks are plausible.

I am not convinced mandate targets are really useful. The Bank of England, the Royal Bank of Australia, and the ECB seem to be cornered by their rates. In each case, the bank is willing to exceed their mandate in the short term while they wait for their respective economies to slow enough to justify further rate action.

Had the Fed been similarly handcuffed, it is unlikely they would have cut rates as substantially or as fast as they did in the last year. (Though watching Jim Cramer's head explode on national TV would have been great entertainment).



3) Paulson Pushes Covered Bonds

In what could be a major strike against the credit crunch, US Treasurer Hank Paulson announced best practices for covered bonds.

What are covered bonds and why would they help?

Glad you asked.

Like the mortgage backed securities that got the US into this mess, they are mortgage pools backed by cash flow.

I can hear the groans an snores already, but stay with me.

Unlike the CDOs of recent years - the originating institution MUST keep the security on their own balance sheet. That is, they can not sell them off to others. Perhaps the biggest problem with the recent run in mortgage securities is that they were sold off to other institutions. Forcing them to stay with origination should enforce higher lending standards.

More specifically, covered bonds would have the following limits:
- balance stays on asset sheet of lender
- covered bonds can not exceed 4% of lender liabilities
- loans must have documented income
- mortgages over 60 days delinquent must come out of the pool
- investors in the pool must be updated monthly

Today, Europe's mortgage market largely functions under this model to the tune of $3 trillion. In contrast, their are virtually no covered bonds in the US.
Credit Crunch, housing, Fed, SEC, USD

Forex Preview July 27 - Aug 1

Jul 27, 2008

Save for a whirlwind of activity on Tuesday, this week is largely devoid of major macroeconomic reports.

The key macroeconomic themes will once again be
a) European CPI (Germany, Italy, the Eurozone, and Switzerland)
b) US Nonfarm payrolls Friday

With oil falling 15% over the last 3 weeks, European CPI and may come in as expected. A slight stunner considering the recent series of higher than expected readings.



Monday July 28
7:30pm Japan Household Spending
7:50pm Japan Retail Sales and Trade

Tuesday July 29
Germany CPI (expect 0.5% MoM, 3.2% YoY)
2:40am France Consumer Confidence (expect -47)
2:45am France PPI (expect 0.8% MoM, 7.3% YoY)
4am UBS Switzerland Consumption Indicator
8am Germany IFO Business Climate Survey
9am US Case Shiller Home Price Index
10am US Consumer Confidence (expect 50)
7:50pm Japan Industrial Production
11pm German Retail Sales

Wednesday July 30
4am Italy PPI (expect 0.9% MoM, 8.2% YoY)
5am Eurozone Consumer Confidence (expect -18)
9:30pm Australia Trade Balance (expect a drastic shrinking from -965 million to -100 million)
9:30pm Australia Retail Sales

Thursday July 31
1:45am Swiss CPI (expect -0.4% MoM, 4.0% YoY)
5am Italy CPI (expect 0.4% MoM, 4.0% YoY)
5am Eurozone CPI Estimate (expect 4.1%)
5am Eurozone Unemployment (expect 7.2%)
8:30am US Q2 GDP (expect annualized 2.0%)
8:30am Personal Consumption (expect 1.4%, core 2.0%)

Friday August 1
2:30 am Australia RBA Commodity Index
8:30am US Nonfarm Payrolls (expect -75k)
8:30am US Unemployment Rate (expect 5.6%)
10am US ISM (expect 49.2 Manufacturing)
1pm Italy Government Budget
CPI, jobs report, AUD, EUR

FX Preview July 20 - July 25

Jul 19, 2008

This is a light weak for market data, with the most interesting reports coming out of:
Australia (PPI on Sunday, CPI Tuesday)
Canada (Retail Sales Tuesday and PPI Wednesday)
UK (BOE minutes Wednesday, Retail Sales Thursday, and Q2 GDP Friday)

Be careful getting long AUDUSD as the breakdown in oil and gold could spell trouble for the commodity based Aussie. I would stay long AUDNZD as that play is based on the comparative directions of the 2 economies.

Earnings from several regional banks and a possible diplomatic deal with Iran could be the biggest market movers for the USD.


I will be taking the next week off. Have fun trading!


Sunday July 20
9:30pm Australian PPI (expect 1.6% QoQ, 5.3% YoY)


Monday July 21
3:15am Swiss Producer and Import Prices (expect 0.5% MoM, 4.4% YoY)
time not listed Bank Of America Earnings (expect 0.53 a share)


Tuesday July 22
2:15am Swiss June Trade Balance (expect 1.6 billion)
4am Italy Trade Balance
8:10m US treasurer Hank Paulson Speaks
8:30am Canadian Retail Sales (expect 0.5% MoM)
9:30pm Australian CPI (expect 1.3% QoQ, 4.3% YoY)
time not listed Bank of Florida earnings (expect -0.01 per share)
after market close Etrade earnings (expect -0.14 per share)
after market close Washington Mutual earnings (expect -1.05 a share)


Wednesday July 23
4am Italy Retail Sales (expect 0% MoM, -0.4% YoY)
4:30am Bank of England minutes from last policy meeting
7am Canadian PPI (expect 0.5% MoM, 2.9% YoY)
7am Canadian PPI Core (expect 0.1% MoM, 1.6% YoY)
10:30am US Crude Inventories
5pm Reserve Bank of New Zealand Rate Decision (expect hold at 8.25%)


Thursday July 24
4am German IFO Survey (look for weakness mirroring the ZEW Survey last week)
4am Eurozone Current Account
4:30am UK Retail Sales (expect -2.2% MoM, 4.4% YoY)
10am US Existing Home Sales (expect 4.97 million)
7:30pm Japan CPI July


Friday July 25
4:30am UK Q2 GDP (expect 0.2% QoQ, 1.6% YoY)
8:30am US Durable Orders (expect 0%)
10am US New Home Sales (expect 507k)
10am US Michigan July Consumer Sentiment Finalized (expect 56.3)
time not supplied T Rowe Price earnings (expect 0.60 per share)
BOE, CAD, AUD, upcoming reports, RBNZ, Ifo, Pound

Oil, Bank Earnings Drive USD Higher

Jul 17, 2008

FX Traders caught up in the fears of an American financial apocalypse have relented to the change in market perceptions the last 2 days.

Most notably has been an $18 dollar drop in oil futures. Since Fed Chairman Ben Bernanke spoke before the Senate on Tuesday, oil has seen a precipitous drop. 3 factors seem to be driving the drop off:
a) a perception that a global slowdown will reduce oil demand below current forecasts b) A notable uptick in US supplies on Wednesday c) a perceived cooling in Middle East tensions as the US seeks to establish an Interest section in Iran and Israel - Hezbollah exchange prisoners.

Oddly enough, while I believe traders have over reacted to credit concerns recently, I also believe traders are over discounting Middle East problems. The Hezbollah celebrations and political spins of victory seem to increase the chance of an armed conflict. With Prime Minster Olmert stepping down in September, Israeli hawks seem destined to take the reigns of the next government.

On the credit front, the US has seen a significant rebound. US Banckcorp, Wells Fargo, and JPMorgan Chase have beat analysts expectations. And, Fannie Mae and Freddie Mac have rebounded in a big way. Undoubtedly, this was triggered by the 3 prong attack of Bernanke, Paulson, and Cox. IMO, SEC Chairman Cox's banning of naked shorts may have been the biggest impetus for the sudden reversal in the fortunes of these struggling financials.

So where to now?

Good question. For tomorrow at least, things should be Dollar bullish as German PPI plus Citigroup earnings may give a nice little bump up in the EURUSD.

OTOH, if PPI is in the least bit tame, and Citi joins Wells Fargo and JPMorgan, look for a pull back below 1.57.

In the near term, I remain as confused as just about every other financial body on this trade. But, as an old trader friend used to tell me, their is no such thing as a double top. That is, if a market tests a point twice and fails, we are almost certain to see a pull back of sorts. If that is to be the case, the EURUSD could easily fall back to the 1.53 levels.
Greenback, EUR, oil, USD

Is Systemic Risk Over Hyped?

Jul 15, 2008

Certainly systemic risk is a real threat to the US Dollar.

With Fannie Mae and Freddie Mac woes (each down 75% year to date) and other banks encountering credit related problems it is easy to be glum. With record energy and food prices it is easy to be pessimistic about US growth.

But is it really financial Armageddon?

Are traders justified in running up the Euro and Pound in the face of more pessimistic data out of Europe?

In the short term, perhaps yes.
In the medium term, I don't think so.

What the US has going for it
This is not your grandfather's depression.

First, you have a Fed with far fewer constraints vis-a-vis the 1929 Fed. Indeed, the Fed is now run by monetarists who have extensively studied and argued how the Great Depression could have been avoided. Are they wrong? Only the markets can answer that in the long run, but early indications, while sometimes obscured in a sea of negative presidential year rhetoric, are to the contrary.

Consider this, the Fed today has increased expectations for annual GDP growth to 1.0% - 1.6% vs earlier forecasts of 0.3% - 1.2%. In addition, monthly job losses have held below 100k, far below previous recession peaks of 300k+. Q1 GDP was revised upwards from an annual rate of 0.6% to 1.0%. Exports remain a source of growth while inventory is tightening (meaning exporters are only buying what they can move).

And in a great sign for the tech sector, Intel posted prfit gains of a whopping 25% today. I have long suggested the housing recession would end in part with a Web 2.0 / High Def / extreme bandwidth tech cycle.

Second, the US government has bankers in all the right places. Hank Paulson of Goldman Sachs fame runs the US Treasury. And now the US Senate has finally confirmed a banker for the Fed in Elizabeth Duke. These 2 combined can provide an immense amount of insight and necessary guidance in steering the US through the economic storm.

Third, after entering the credit crisis while sitting on their hands, various entities have become innovative and expanded beyond the standard usage of interest rate policies to move markets. This was first demonstrated by the Fed when they negotiated the sale of Bear Sterns to JPMorgan Chase and opened the discount window to investment banks.

And lately, this innovation has gone further. Including a) the Fed opening the discount window to Fanny and Freddy b) the Treasury asking congress to grant emergency powers to expand GSE credit facilities and purchase equity and most recently c) Christopher Cox banning naked shorts on Lehman Brothers, Goldman Sachs, Merill Lynch, Morgan Stanley, Fanny, and Freddy

If the shorts get too bold, and the Treasury is granted permission to buy equity, I trust that Hank Paulosn knows how to coordinate a short squeeze. While perhaps unethical and smacking of market manipulation, it is a possible strategy that Mr. Paulson may use to restore value in Fanny and Freddy, and thus renew investor confidence in the mortgage markets.

As Mr. Paulson said before the Senate today, when you walk down the street with a squirt gun, you are likely to have to use it. When you walk down the street with a bazooka, others are unlikely to test you. So it shall be with the Treasury and GSE shorts.


What the Eurozone has going against them

In short, a crises of false hopes.

Today, some traders are fleeing to the Euro in the mistaken belief it is a safe heaven against a systemic crises in the US.

They could not be more wrong.

Consider the latest data, the ZEW Survey came in at an astoundingly low -63.9, European auto sales are down -8% year over year, Italian GDP has been slashed from 1.0% this year and next to 0.4% in 2008 and 2009, and ECB members now warn of growth risks despite their mandate to keep inflation in check. And that all happened today, when the Euro set fresh new highs.

As things settle down in the US, Euro longs may be in for a rude shock as markets readjust for recent macroeconomic data.

Indeed, ECB Council Member Vito Constancio has sounded rather Greenspanian circa 2004. He warned "Under normal circumstances, a rise in the interest rate by the ECB would have resulted in higher medium-term rates and a higher euro. Well, the exact opposite happened," Sounds like the EU is facing their own conundrum.

With the global economy slowing down, fx traders in late 2008 / early 2009 are likely to see an environment where the US is raising rates while Europe, the UK, Australia, and New Zealand are cutting rates and the Swiss and Canadians at best hold firm. Such an environment will put a smackdown on the current Carry Trades.


Again, don't get me wrong. This is NOT short term advice. I would not put a stop in the EURUSD below 1.5781. But with FX markets currently ignoring macroeconomic data to focus on systemic risk, it is better to keep a clear perspective on the entirety of the big picture.
ZEW Survey, Credit Crunch, Hank Paulson, Bernanke, EUR, USD

Israel - Lebanon Tensions Grow

Jul 14, 2008

In an environment of rising tensions between Israel and Iran, Lebanon has now taken center stage.

In the last week, 2 signs of another war have emerged.

1) Reports indicate that Iran, Syria, and Hezbollah have set up an advanced radar on Mt. Sannine. The mountain, which rests in central Lebanon, stands at 7,800 feet and is considered to be of great importance strategically.

In May of this year, Hezbollah staged a dramatic series of clashes over the Lebanese government's decision to sack a Hezbollah airport chief thought to have set up an intelligence gathering operation.

The radar on Mt. Sannine would allow Iran, Syria, and Hezbollah to monitor Israeli aircraft.

2) The Lebanese Armed forces has recently begun road work and the development of military posts in the Shaba Farms. This region lies at the junction of Israel, Lebanon, and Syria, and is also considered strategically important.

Over the weekend, Lebanese President Michel Suleiman warned that should diplomacy fail to return "Israeli-occupied land" to Lebanon, the LAF will take it by force.

Israel left the area unilaterally in 2000.

Israeli Defense Minster Barak has stated that "We should be saying clearly: Resolution 1701 has not worked, is not working and will not work. It is a failure."

Resolution 1701 was passed after the 2^nd Israel-Lebanon war. Among it's key provisions was an affirmation that Hezbollah should be disarmed.

With oil markets trading on fears of a strike on Iran, this is not good news.
oil

Bernanke, Paulson, Cox Take Center Stage

Jul 14, 2008

The US Dollar is likely to see unusually high volume starting at 10am est tomorrow.

At that time, Fed Chairman Ben Bernanke will have the floor to himself when he gives his semi-annual monetary policy report. The discussion will likely center on today's revision to mortgage lending rules and when Mr. Bernanke believes the credit crises will abate.

In an unusual move, Treasurer Henry Paulson and SEC Chairman Christopher Cox will join Mr. Bernanke at at a second hearing. No doubt, the topic of discussion will center around steps taken to prevent the collapse of Fannie Mae and Freddie Mac. This hearing will take place after Mr. Bernanke's monetary policy report.

Senator Chris Dodd, head of the Senate Committee on Banking, Housing, and Urban Affairs has indicated that he is receptive to the proposals put forth by Hank Paulson over the weekend. Senator Dodd stated that "Fannie and Freddie are in sound shape, but fear produces its own results". He further implied that he hopes to add amendments enacting Mr. Paulson's recommendations to last week's housing bill. The bill would then likely pass in time for President Bush to sign by Friday of this week.

US Dollar trades may also see some movement when reports on retail sales, PPI, and the Empire Manufacturing Index are released.

Retail sales are expected to rise 0.5% (1% excluding auto).

Lehman Brothers, the entity responsible for kicking up the Fanny and Freddy storm last week, is looking for 1.3% MoM and 8.5% YoY on the PPI.

The Empire manufacturing index is expected to come in at -5.

The German ZEW Survey will be released at 5am tomorrow, and may surprise to the downside. Industrial production has fallen off dramatically in France and Germany and trade balances shrunk last week.
Credit Crunch, Bernanke, Fed, USD

Fed, US to Bail Out Fanny and Freddy

Jul 13, 2008

On Sunday, US Treasurer Hank Paulson and the Fed announced 4 steps to secure the future of Fannie Mae and Freddie Mac.

1. The 2 entities can now borrow from the NY federal reserve. This is the same emergency lending facility granted to investment banks earlier this year.
2. The Federal Reserve will play a greater role in any future changes to their regulations
3. The US will expand the lines of credit (currently $2.5 billion) provided by the federal government
4. The US government will be able to buy equity of the 2 giants.

Steps 3 and 4 still need congressional approval. In an election year, they seem likely to pass. Chances are further improved by the perception that Senator Chuck Schumer (D - NY) may have had a role in the collapse of IndyMac.

One has to wonder why step 1 (access to the Fed discount window) was not done earlier this year when the privilege was extended to investment banks.

Shoring up the giants is mission critical for the US. Between the 2, they hold $5 trillion in mortgage debt. Just 2 years ago, they were underwriting roughly 30% of all mortgages. Today, that number number has grown to 70%.

With all the attention drawn to Fanny and Freddy, one has to ponder the fate of Lehman Brothers.
Credit Crunch, Hank Paulson, Fed

FX Preview July 13 - July 18

Jul 12, 2008

The economic calendar is chokingly full of events this week,

The early part of the week will be dominated by CPI reports, with data coming out from New Zealand (Mon) Italy, UK (Tue), Germany, France, the Eurozone, and US (Wed).

The back half of the week will be dominated by US bank earnings reports from JPMorgan Chase, Merrill Lynch (Thu), and Citigroup (Fri).

Monday night may see some big movement in the AUDNZD, with New Zealand's Consumer Prices and the RBOA minutes reported 15 minutes apart.


Sunday July 13
6:45pm New Zealand Retail Sales (expect -0.1% MoM, 0.5% MoM excluding auto)
11pm Bank of Japan Rate decision (expect hold at 0.5%)


Monday July 14
4:30am UK PPI (expect 2.6% MoM, 29% YoY)
10:00am Fed Governors Vote on Mortgage Rules in Open Meeting (this is a set of new rules crafted by the Fed. The policy is for lending hundreds of billions of dollars to banks and other financial entities to ease a severe credit crunch. It is unclear how big a role the recently confirmed Elizabeth Duke, a Virginia banker with an insider perspective, played in crafting this policy.)
8:45pm New Zealand Consumer Prices
9:30pm Bank of Australia Minutes from July Meeting

Tuesday July 15
4:00am Italy CPI (expect 0.4% MoM, 3.8% YoY)
4:30am UK CPI (expect 0.4% MoM, 3.6% YoY)
5:00am German ZEW Survey (expect -55)
8:30am US PPI (expect 1.3% MoM, 8.7% YoY)
8:30am US Empire Manufacturing Index (expect -5)
8:30am Retail Sales (expect 0.5%, 1.0% excluding auto)
10:00am Fed Chairman Ben Bernanke testifies before the Senate
11:00pm Reserve Bank of Australia Governor Stevens Speaks
unknown time First Mariner Bank (FMAR) reports earnings (expect -0.21 a share, stock has plunged since Chuck Schumer's infamous letter)


Wednesday July 16
2:00am Germany CPI (expect 0.3% MoM, 3.3% YoY)
2:45am France CPI (expect 0.4% MoM, 3.6% YoY)
5:00am Eurozone CPI (expect 0.4% MoM, 4.0% YoY)
before 8:30am, Wells Fargo (WFC) reports 9expect 0.50 a share)
8:30am US CPI (expect 0.7% MoM, 4.5% YoY)
8:30am US CPI ex food and energy (expect 0.2% MoM, 2.3% YoY)
10:30am Crude Inventories
10:00am Fed Chairman Ben Bernanke testifies before the House

Thursday July 17
6:30 am JPMorgan Chase (JPM announces earnings (expect 0.47 a share)
before 8:30am MGIC Investment Corp (MTG) reports earnings (expect -0.61 a share)
10:00am US Philly Fed Index (expect -15.0)
4:00pm Merrill Lynch (MER) reports earnings (expect -1.91 a share,

Friday July 18
5:00am Eurozone Trade Balance (expect -€1.0 billion)
before 8:30am Citigroup (C) reports earnings (expect -0.59 a share)
ZEW Survey, CPI, Credit Crunch, upcoming reports

Assessing FX Trades After a Crazy Day in America

Jul 11, 2008

Unless you have had your head buried in the sand, the multiple crises of the day have not escaped you attention.

On the one hand, we have a continuing credit crises in America, (Fannie, Freddie, and Lehman Bros). On the other hand, we have major global political instability (Iran, Nigeria, likely Sudan indictment, failed Zimbabwe sanctions, Russia trying to buy Libyan oil).

So what is a forex trader to do?

Going long the Euro seems like a safe heaven. But did it move on Euro strength, or perceived Dollar / Pound / Yen weakness? I think the answer is the latter.

So what trades do we take on?

At the end of the day, FX prices are largely determined by 2 factors - interest rates and economic outlook. So let's take a look at these 2 factors compared to some of the majors.


USD - Interest rates remain low. And after this week, it is hard to believe the Fed will raise rates in the next few meetings.

OTOH, jobs, trade balance, and the preliminary Michigan consumer sentiment all beat expectations. It is far too soon to have a rosy outlook on the economy, perhaps a slew of earnings next week will help establish some clarity on that factor. Merril, Citigroup, JP Morgan, Intel, and Google will report earnings.


EUR - Trichet has 'no bias'. Several prominent Euro finance ministers and the vice president of the ECB have stressed the need for a balancing of growth and inflation. One can not say with any definitive certainty that interest rates will rise.

On the economic front, the situation continues to deteriorate (though nowhere near as fast as in the US). Trade balances disappointed this week. Production and confidence is falling.

The currency will almost certainly pass 1.61 in the next week, but beyond that the future is uncertain.


GBP - Interest rates remain at 5%. However, many traders and economists actually speculated they would cut rates at their meeting on Thursday, despite their inflation problems.

Like the US, their economy is struggling amidst a credit crunch. Housing continues to fall. Relative to the US, housing may prove to be a bigger problem for the Brits, as they have a higher percentage of toxic debt, and more personal indebtedness.


AUD - Interest rates remain at an astounding 7.25%. And speculators constantly suggest the bank may still raise rates again.

This week, jobs come in positively at almost +30k, wiping out last month's losses. Overall, the economy seems to be humming along. And why shouldn't they? China and India have been great export customers in a commodity driven environment.


NZD - While interest rates remain high, pressure is building for cuts. They certainly won' raise rates anytime soon.

On the economic front, things are worsening as they too suffer from a decline in housing, reduced consumer confidence, and a declining trade balance.


CAD - Interest rates remain stable at 3%, and are unlikely to change next week. That they did not cut as expected by many last month suggests their bias may be to raise rates. Look for any BoC comments next week for guidance.

On the economic front, they continue to do well. Being a large oil exporter with these record prices certainly doesn't hurt. Building permits and trade surprised to the upside this week.


JPY, CHF - No comment.


By my assessment, long term trades should focus on:
go long the AUD and CAD.
short the GBP and NZD.
avoid EUR and USD for anything but short term scalps as their is distinct lack of clarity.

My recommended trade would be long the AUDNZD
CAD, trade balance, AUD, fundamental, EUR, GBP, USD

Eurozone Slowing Down

Jul 9, 2008

Yesterday, German and Belgium finance ministers stressed the need for a balance between inflation and growth. In essences, they were suggesting that a slow down in the Eurozone would naturally reduce inflationary pressures.

Today, those comments were followed up with signs of a European wide slow down.

First, trade balances worsened in Germany and France.

Then, the Eurozone Q1 GDP was finalized at 0.7%, vs expectations for 0.8%. Still a healthy annualized growth rate of 2.2%,

But then the real kicker came in to play. The German IFO and suggested that annualized GDP at 1.6%. And this figure was based on the assumption oil prices stabilize at US $135 and the Euro remains around 1.57

In particular, they noted "the acceleration (in Q1 GDP) clearly overstated the underlying trend. Real GDP growth is forecast to slowdown considerably in the coming quarters, expanding at rates of 0.0% in Q2 and 0.3% in both Q3 and Q4"

The Ifo went on to report "The expansion of investment is likely to moderate considerably in the coming quarters as the demand outlook becomes dimmer, pressures on productive capacity are easing and external financing conditions are deteriorating."

And, most ominously, they warned of housing problems in other European countries. Noting, "the construction component of investment is depressed by the real-estate downturn observed in an increasing number of Euro-zone countries."

Outside of the Eurozone proper, the UK has gone into contraction in service, manufacturing, and construction.

And now Ireland, the Irish tiger, is also warning on a recession. Irish unemployment has climbed to 5.7%, property prices have dropped 10%, and the economy shrank by 1.5% in Q1.

Eventually, slow downs in the UK and Ireland will spillover to the Eurozone.


Forex markets could be facing a rather interesting situation later this year, as the Fed may be raising rates at a time when central banks across Europe are cutting.
Euro, GDP, housing, Ifo

Euro Trade Narrows, Ex Fed Surprises

Jul 9, 2008

The German trade surplus narrowed unexpectedly to €14.4 billion. This was against a forecast of €18 billion. The French trade balance fell to -€4.5 billion vs an expected €4 billion expected.

Meanwhile, in a bit of unexpected news, ex Fed Laurence Meyer has spoken about the emergency lending facility to investment banks. Mr Meyer, who achieved a PHD in economics at MIT as did the Fed's Bernanake and ECB's vice president Papademos, suggested the emergency lending facility will be extended into 2009. This suggests housing foreclosures, and thus the credit crunch, will extend into 2009.
trade balance, Fed

Trade Balance, US Oil Inventory

Jul 8, 2008

Well it's about time the oil bull took a rest. Fresh off the July 4 holiday weekend, oil has slipped $9.25 in 2 days. Are traders banking on lower than expected holiday consumption? And if so, were they right?

Overseas, markets will move from the wee hours (est) on trade balance reports from Germany (2am) France (2:45am), and the UK (4:30am).
trade balance, oil

Quotes to Note

Jul 8, 2008

Some days we need to listen to comments rather than read reports.

In Europe, ECB vice president Lucas Papademos, who received a PHD in economics at MIT 1 year before Fed Chairman Bernanke, struck a balanced tone between on inflation and growth. "We are witnessing a period of rising inflationary pressure, moderating growth and continued tensions in the financial markets."

Mr. Papademos comments were echoed by German and Belgian Finance Ministers.

German Finance Minister Peer Steinbrueck stated "It (inflation) will have a negative impact on domestic demand and therefore also on the economy...(but) The economic clouding in Germany and in many other countries will obviously result in a certain counter effect to inflation."

Belgian Finance Minister Didier Reynders stated "We are more focused on the next weeks and months....to pay attention also to growth and not only to inflation"

Europe may have turned a corner, as these comments suggest they are now trying to balance inflation AND growth concerns.

French Finance Minister Christine Lagarde, who for the past few months has chided Trichet and the ECB for their singular inflation focus, must be pleased.



Meanwhile, back in the states, Richmond Fed President Jeffrey Lacker struck a particularly hawkish tone. Speaking at the National Economic Club, he made a number of key statements.

"It could happen that we find it necessary to raise rates even if unemployment is still rising and growth is weak...It's something we need to be prepared to do."

"While the risk of an acute near-term downturn has not entirely disappeared, it has diminished substantially"

And perhaps most importantly, Mr. Lacker noted that the personal consumption indicator (PCE) was running at 3.9% over the last 3 months and that "for several years I have suggested an inflation target of 1.5 percent"

Sounds like Mr. Lacker will be voting for a rate hike sometime this fall.

On the flip side of that coin though, Fed Chairman Ben Bernanke indicated that the central bank may keep the emergency lending facility open through the year.

Would the Fed really raise rates (and thus extend an economic slow down) if they are lending money to investment banks? While that is unlikely, rate changes usually take 6 - 9 months to take full effect. And, as evidenced by Mr. Lacker's comments, a stronger dollar may reduce import prices and thus help economic growth.
inflation, finance minsiter, Lacker, comments, Papademos

FX Markets to Trade on Gloomy News

Jul 7, 2008

Central banks are navigating choppy waters. And so too, are Forex traders.

With so much uncertainty over slowing economies and rising inflation, it is little wonder.

In this double negative environment, the majors are likely to remain confined to recent ranges.

Today was a perfect example. First, the Pound took a dip as UK industrial production dropped -0.8%, a stumble considering expectations for a drop to -0.1%.

90 minutes later, the Euro followed suit, as German industrial production fell at even faster rate. The Germans reported a drop to -2.4%, a major tumble considering market forecasts for a +0.3% reading.

Next it was the Dollar's turn. First, Lehamn Brothers warned that Fannie Mae and Freddie Mac may face their own credit problems, as they may need to raise a combined $75 billion to offset write downs on largely prime loans. And SF Fed President Janet Yellen suggested home prices will continue to deteriorate into 2009. Those 2 reports stoked minor rallies for the Euro and Pound.

With inflation ramping up, markets cooling down, and central banks hoping that slowing economies will bring prices down - their is little reason to believe the forex markets will behave any differently in the near future.

For the duration of the summer the EURUSD will likely to remain between 1.53 - 1.59, while the GBPUSD will likely trade 1.94 - 2.00.
EUR, range bound, GBP, USD

Forex Outlook July 6 - July 11

Jul 6, 2008

Welcome to another fun filled week of forex trading.

This is the week of trade reports! Germany, France, UK, and Japan report Wednesday. Canada and the US report on Friday.

Beyond those reports, the week is largely dominated by speaking opportunities. Fed officials have 3 major speaking engagements, and the Bank of England Rate decision comes on Thursday.


G8 Summit July 7 - 9


Sun July 6
9:30pm German Wholesale Price Index (expect 1.0% MoM, 9.0% YoY)


Mon July 7
4:30am UK Industrial Production (expect -0.1% MoM, -0.7% YoY)
11am US SF Fed President Janet Yellen Speaks on Economic Outlook. She is considered an inflation dove.


Tue July 8
8:30am US Fed Chairman Ben Bernanke Speaks on Mortgage Lending
10am US Pending Home Sales for May (expect -2.5% MoM)
2:30 pm US Richmond Fed President Jeffrey Lacker speaks on Economic Outlook. He is considered an inflation hawk. This was demonstrated when he dissented with the FOMC in 4 straight meetings in 2006 by voting for rate increases.
7pm UK Consumer Confidence


Wed July 9
2am German Trade Balance for May (expect €18 billion, -€0.7 billion from previous)
2:45am French Trade Balance for May (expect -€4 billion, -€0.3 billion from previous)
4:30am UK Trade Balance (expect -£4 billion)
5am Eurozone Q1 GDP Finalized (expect 0.8%, same as preliminary)
10:30am US Crude Inventories
7:50pm Japan Trade Balance for May (expect ¥487 billion )
10:30pm Australian Unemployment


Thu Jul 10
7am UK Bank of England Rate Decision (expect hold at 5%)
10am US Fed Chief Bernanke and Treasurer Henry Paulson testify before Congress


Fri July 11
7am Canada Employment (expect +10k)
8:30am Canada International Trade (excludes services) (expect 5 billion)
8:30am US Trade Balance (expect -$61 billion)
Bank of England, trade balance, Hank Paulson, upcoming reports, Fed

Euro Drops 200 Pips on NFP, Trichet

Jul 3, 2008

With all signs pointing to a possible EURUSD rally - the events let traders down.

After briefly hitting a high of 1.5910, the EURUSD pair has dropped to the lower end of 1.57.

In his morning conference, Trichet repeatedly stated the central bank has "no bias". However, he cautioned that the absence of phrases such as "heightened alertness" and "strong vigilance" was not significant.

In a possible sign for the upcoming G8 summit, Trichet stated "We are convinced that sharp fluctuations between major currencies could have implications for economic and financial stability".

With energy and food inflation high on the G8 agenda, and world leaders gathering next week in Hokkaido Japan, their is some chance of either a forex or energy market intervention.

Meanwhile, in the states, the Non Farm payroll report came close to expectations, losing 62k jobs. and unemployment held steady at 5.5%. Hourly wages grew 0.3% as expected, indicating wage inflation is still not a factor.

However, the ISM service sector slipped back into contraction (48.2 vs expected 52), while the April and May NFP reports were revised down.

Expect the majors to stay range bound until the G8 summit concludes.
Greenback, ECB, G8, EUR, Trichet, USD

Vol a til i ty

Jul 2, 2008

Volatility - tending to fluctuate sharply and regularly.

And that is just what we can expect tomorrow around 5:30am. To make things more exciting, several events throughout the day could could cause reversal.

5:30am est - Europe
European Central Bank President Trichet will likely hold his monthly press conference shortly before or after 5:30am. Markets have already priced in a 25bps hike from the ECB. This event is likely to go 1 of 3 ways

1. ECB raises 25bps, Trichet leaves door open for hikes at the end of the year
2. ECB raises 25bps, Trichet hints at another hike soon, but discounts the notion of a series of hikes
3. ECB raises rates 50bps on expectations of an energy / fx market intervention at the G8 summit July 7 - 9

A host of pressures are certainly on Trichet's shoulders - German unemployment is at a 14 year low, Italian wages are growing, and Slovakian integration on the horizon - the pressure is on..

5:30am est - US
US releases 7 reports - chiefly Non Farm Payrolls (NFP), the unemployment rate, change in manufacturing payrolls, and hourly earnings.

Non Farm payroll Report
ADP, the largest US payroll processor, released a sharply lower number of -79k today. This was vs estimates of -20k. And, they revised May numbers down to +25k from +40k.

While the ADP can be grossly inaccurate, the numbers are backed up the drop in ISM manufacturing released yesterday. According to the ISM, the manufacturing employment reading came in at 43.7. That is the lowest level since May 2003, when the reading came in at 42.4.

With this series of bad numbers, it is unlikely that the NFP comes in near market expectations of -55k. I am now looking for a reading closer to -90k.

Last month, the NFP came beat expectations, but the unemployment rate jumped to 5.5%, sending the Greenback down. It is hard to tell where this number will come in, but I again expect it to be to the downside at 5.7%.

10am - US
The ISM will release their service sector report. While this won't save the Dollar if it has been slammed all morning, it will offer traders to rationalize some consolidation if the EURUSD has skyrocketed.

11am - US
Markets close for holiday.

The best pair to trade tomorrow will likely be the EURJPY.

The muddle of US and ECB data can prove to be too confusing. And while the USDJPY is poised for some upside potential technically, a negative jobs report will undo any of the short term momentum.

The EURJPY on the other hand, while likely be focused strictly on the ECB rate hike.
ECB, jobs report, EUR, Trichet, rate hike, USD

ISM Boosts Greenback, Portends NFP Drop?

Jul 1, 2008

The ISM beat market expectations today, as PMI came in at 50.2 vs 48.0 expected.

The last time the report came in above 50 (the line between contraction and growth) was January 2008.

Markets reacted positively, with the DJIA up around 100 pts. The market had started the short trading week down 160 points.

The sentiment carried over to the currencies, as the Pound dropped below the 2.00 rate reached overnight.

Market participants would be wise to take caution with this report. Prices are up sharply - since October 07 the report has risen from a reading of 63 to 91.5. That is by far the largest move in any of the 10 components over a similar period.

Additionally, Employment came in at 43.7, nearly 2 points off May's reading of 45.5. That may spell trouble for Thursday's Non Farm Payroll report. The NFP will be released at 8:30am est, 45 minutes after the ECB meeting. US Average Hourly Earning will be release at the same time.

If the EURUSD is to break the 1.58 resistance that has held sway since March, Thursday seems to be the day.

Table of ISM Data since the markets peaked in October.

	Jun	May	Apr	Mar	Feb	Jan	Dec	Nov	Oct
PMI	50.2	49.6	48.6	48.6	48.3	50.7	48.4	50.0	50.4
New Orders	49.6	49.7	46.5	46.5	49.1	49.5	46.9	52.5	52.8
Production	51.5	51.2	49.1	48.7	50.7	55.2	48.6	51.3	50.1
Employment	43.7	45.5	45.4	49.2	46.0	47.1	48.7	48.4	51.8
Supllier Deliveries	55.1	53.7	54.0	53.6	50.1	52.8	52.6	51.5	50.7
Inventories	51.2	48.0	48.1	44.9	45.4	49.1	45.4	46.4	46.5
Customers' Inventories	55.0	47.0	45.0	51.0	49.0	49.5	51.5	49.0	54.0
Prices	91.5	87.0	84.5	83.5	75.5	76.0	68.0	67.5	63.0
Backlog of Orders	47.5	46.0	51.5	47.5	45.0	44.0	43.0	41.5	46.0
Exports	58.5	59.5	57.5	56.5	56.0	58.5	52.5	58.5	57.0
Imports	46.0	49.5	48.0	45.0	47.5	52.5	48.0	47.5	47.5

inflation, ISM, PMI

There is a substantial risk of loss in forex trading.
You should only trade with risk capital that you can afford to lose without impacting your lifestyle or retirement plans.

The views expressed on this site represent the current good faith views of the authors at the time of publication. Please be advised that these views are subject to change at any time and without notice.